Home > management, Markets, trading > Profitable ETF Trading Strategies: understand your trader quality number

Profitable ETF Trading Strategies: understand your trader quality number


 The system quality number that is taught by the International Institute of Trading Mastery is a very powerful way of calculating a single number that describes the relative quality of a particular system, given a set of trading results that are typical for that system. It is a methodology that allows you to compare average results with typical volatility over a statistically significant data set to determine if there is a quantitative and qualitative difference between two systems.

 
The system quality number is a powerful idea as far as it goes. Many traders, however, discover that the actual results of the system they propose to trade come in different than those suggested by the backtest. One of the important differences between backtesting in forward testing with real money is the human factor of the trader himself and his affect on system performance.
 
Sometimes the traders’ actions add value to a system. Frequently the traders’ actions take away value. The reasons for this can be numerous and varied and usually there is a combination of reasons why the trader degrades the performance of a particular system. It is normal for an inexperienced trader to overrule the specific system rules that add the most value to the new system.
 
An example of this would be to refuse to take an entry signals because of a particular belief in where the market is going to go next. This will normally occur when you see the system rules putting you into trades that don’t make sense to your intuition. It may be the very counter-intuitive nature of the system that adds value to the results. If your psychology is aligned with that of the masses, then you will tend to overrule the system precisely when it is taking advantage of mass psychology.
 
As a result of this phenomenon, it is useful to think of a trader quality number which incorporates the system quality number as modified by the traders’ actions.  Only by taking meticulous notes of when and where the trader deviates from the system’s rules can we determine if in fact he is adding or subtracting value. By examining the results from numerous examples of trader intervention, we can determine if it’s a good idea for the trader to have discretion or not when executing the system.
 
It takes an incredible strength of will and character to take a look at the results of your own interventions and then act in a professional manner based on your analysis. If you can do that however, you have the fortitude and character to be a great trader.
Know your trader quality number as well as your system quality number and let that be your guide.

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